The coronavirus pandemic and the enforced work from home rule that workers and businesses quickly adapted to has caused, what appears to be, a permanent change in the way that many of us now work and expect to work going forward. The era of “Hybrid Working” is now upon us! Whilst there were some companies who already had well documented policies, processes and infrastructure in place for their employees, other organisations had to move quickly to introduce policies written firmly in the shadow of COVID-19, at a time when particular tax rules had been relaxed by HMRC.
With the pandemic apparently now behind us, certain concessions made by HMRC to help the nation during COVID-19 are being withdrawn or were made on a time limited basis and have now lapsed. Companies may therefore have based their policies for hybrid working around certain tax rules which are no longer applicable and may need to update them to avoid unwelcomed headaches going forward.
Reimbursement of employee home office equipment
One of the most welcome and practical concessions made by HMRC, which lasted up until 5 April 2022, was that employers were able to reimburse employees for the purchase of home office equipment, tax-free, provided that:
The primary purpose of the equipment was for work purposes.
The employee was the owner of the equipment (an important point for later on) and;
There was no requirement for the employee to agree to handing the equipment over to their employer at the end of their employment. Personal use of the equipment was allowed providing this was incidental to the main purpose of the equipment being for work (again an important point to note).
This highly practical step was essential to facilitating the immediate shift to working from home in March 2020. It relieved employers of a logistical and costly nightmare of having to source and provide equipment directly to large numbers of their employees no longer able to work from the office.
The concession lapsed on 5 April 2022 and pre pandemic rules are now back in force. Going forward, Employers who have designed their policies and processes around reimbursing employees for the purchase of essential equipment such as a desk, chair, monitor etc, rather than furnishing their home office directly will need to have a rethink.
Employers can still provide equipment to employees directly and the criteria for the tax relief remains the same:
the main purpose of providing the equipment is for the performance of the employee’s duties and incidental personal use is allowed.
The only time a tax charge will arise in respect of equipment provided directly to the employee is if a transfer of ownership (from the employer to the employee) occurs, most likely at the end of the employment when the cost to the company of collecting the equipment outweighs the cost of the equipment.
From 6 April 2022 employers can no longer reimburse employees for the cost of equipment they have purchased themselves without the employee incurring a charge to tax.
In this scenario the employee effectively owns the equipment so the purchase of it by the company is seen as the employer meeting a “pecuniary liability” of the employee’s. Such payments are treated as additional employment income for the employee.
Any reimbursements of this nature need to be reported via payroll along with normal wages and are subject to the withholding/payment of PAYE income tax and Class 1 National Insurance Contributions.
Tax relief may still be available for the employee, but this has to be claimed directly from HMRC via the self-assessment system. The important point here is that the employer is obliged to process the transaction through payroll.
Not only will claiming tax relief be more administratively heavy for employees the real “sting in the tail” is that the criteria on which the tax relief is granted is much stricter for employees making the claim through self-assessment.
When tax relief is claimed directly by the employee it is necessary to be able to satisfy that the expense was incurred “wholly, exclusively and necessarily” for the delivery of their employment duties. This means that there can be no personal use of the equipment at all.
I would be surprised if there were many employees who could honestly say that their home office desk and chair have never been used for anything other than work. An assumption HMRC share when assessing employee claims for tax relief and thus tax relief is unlikely to be given to the majority of employees.
Tax professionals were hopeful that the Covid concessions would endure as the differentiation between whether an employer reimburses an employee the cost of something or provides equipment to them directly is not only unfair to employees in the latter category (due to stricter criteria on which the tax relief is given) but also creates additional costs and has an environmental impact for employers in the purchase and delivery/collection of the equipment to the employees home.
£6 per week allowance in respect to additional household expenses
The 2020/21 and 2021/22 tax years saw HMRC make two changes to the existing flat rate allowance that an employer could pay to employees in recognition of the additional household expenses they incurred due to the requirement to work from home without the need to prove/quantify the additional costs.
The rate was raised from £4 to £6 per week, but more importantly, the allowance applied for the whole tax year so long as an employee was required to work just one day at home during the tax year.
If an employer did not contribute towards the employees’ additional household costs then an employee could claim up to £6 per week as an employment expense, and receive tax relief on this amount. The employee was entitled to claim tax relief on the annual value of £312 at their marginal tax rate. Tax Relief could either be claimed via the self-assessment system or for those that were not required to file under self-assessment, by submission of form P87 or via their personal tax account.
The concessionary treatment has actually been extended for a further year and will continue to apply for 2022/23.
HMRC have reaffirmed the point that the allowance is only payable (by the employer) or due tax relief (if not paid by the employer) when an employee is legally required to work from home. If the employer provides the means to work from an office or other permanent establishment but either the company permits or the employee decides to work from home it is not considered a legal requirement of the job and tax relief would not be due.
Hybrid working arrangements fundamentally provide employees and employers the ability to choose the working location on any given day (at home or in the office) however what the day-to-day and the legal requirements of the job remain the same
If an employee partially performs their duties in the office, then the job does not require the employee to work from home (unless there are very specific circumstances) and therefore they would not qualify for tax relief.
With national lockdowns now hopefully behind us, the sole reason that most people were required to work from home no longer applies, however, it is a trend we see continuing. With energy prices continuing to rise and household disposable income dwindling, employees may find the loss of tax relief (however minimal) in respect of household costs difficult to swallow and look to their employer to address the money they have “lost”. It is important to mention that many employees are benefitting from not having to commute to work so frequently thereby saving money so as with everything, there are costs and benefits.
Hybrid working is still a new concept for many businesses and refining a policy that not only works for the company as well as their employees, and is effective from a tax perspective in the longer term, requires regular review and updates.